Sterling, euro trade lower
GBP/USD declined to 1.3278, down 0.16% on the day, while EUR/USD slipped to 1.1357, down 0.13%
Sterling traded lower on Tuesday while the euro also dropped.
As of 10:30 GMT, GBP/USD declined to 1.3278, down 0.16% on the day, while EUR/USD slipped to 1.1357, down 0.13%.
It feels like the FX market is taking the possibility of a Fed hike tomorrow more seriously, said Chris Turner, Global Head of Markets and Regional Head of Research for UK & CEE at ING.
Turner said the case for an early move is gaining credibility among some observers as a way to boost the Fed’s inflation-fighting credentials and ultimately lessen the need for subsequent tightening, adding that the central bank’s lack of communication has certainly created fertile ground for such speculation.
He said the DXY dollar index can remain bid near 101.50, with an outside risk of pushing up to June’s 101.80 high.
Turner said investors are unlikely to reduce dollar positioning ahead of tomorrow’s Fed meeting, though he flagged lower oil prices and a sell-off in chip stocks, tied to Chinese competition and scrutiny of US hyper-scaler megadeals, as risks to watch.
Tuesday’s decline in sterling was not driven by UK-specific developments; Turner said the pound was instead caught up in broader dollar strength ahead of the FOMC.
Attention now turns to this week’s Bank of England meeting, which ING said could serve as a reminder that the bar is high for a rate hike – something which could weigh on sterling.
The euro’s weakness also reflected dollar dynamics rather than domestic euro-area news, with Turner noting that even this week’s lower energy prices, a boon for Europe, have failed to lift the single currency.
ING sees a break of 1.1360 support opening the door to a retest of the 1.1325 low, and expects EUR/GBP to hold gains near 0.8550, having forecast last week that the cross would climb toward 0.88 later this year.
ING’s base case is for further dollar strength into Wednesday’s decision, with USD/CHF, its preferred vehicle for expressing hawkish Fed views, potentially reaching 0.85 in August if the Fed “blow the doors off” with a hike.